Loan Against Commercial Property

How to get a loan against commercial property?

Many people want to take a loan on commercial property but do not know how to do it. Getting a loan on residential property is certainly more popular, easier to obtain and more widely offered by banks and financial institutions. On the other hand, getting a loan on commercial property is not that easy and people's knowledge in this regard is also very limited.

Commercial properties can be classified into two broad types. They are office space and retail outlets. These two classes can be further divided into two categories - ready for possession and under construction. When it comes to funding against a commercial property that is under construction, lenders are usually apprehensive if the buyers are “investors” and not end-users.

How does a loan against commercial property work?

A loan against commercial property is a type of mortgage loan secured through a mortgage of commercial property rather than residential property. You get money for all kinds of expenses based on the market value of your commercial real estate. It could be higher education, business expansion, marriage, or debt consolidation. You can get a loan against a commercial property by meeting the simple mortgage eligibility criteria and keeping the required documents ready.

Difference between residential and commercial property financing:

Although the financial documents required by the lender to ascertain the loan eligibility of the borrower are similar, there are the following differences-

1. Loan to Value (LTV) Ratio- For residential financing, it ranges between 75% and 90%, however, for commercial purchases the financing percentage is limited to 55%. This means more self-contribution by borrowers.

2. Higher Fees- The processing fee for residential purchases is the standard fixed fee of Rs.10,000/-. Under some schemes, borrowers are also given a fee as low as 'nil'. However, for commercial purchases, it is the standard 1% of the loan amount and some lenders reduce it to as low as 0.5% if they like the borrower's profile as well as the property.

3. High ROI- Rate of interest (ROI) is an important factor while borrowing and in a loan against commercial property, it is at least 1-2% higher than residential ones and it can be 4-5% higher if financial documents exhibit less strength.

4. Builder Category- Lenders are very particular about the profile of the builder if the property is under construction. Whether the commercial property will be ready in time or not is of utmost importance. Generally, the construction of a commercial property will take much less time and the number of occupants in a building will be less compared to residential. For example, a buyer may be for a complete floor plate, or say, the number of toilets built in a commercial setup is very less without shower area etc., which makes construction easier and less time-consuming. Lenders will look at the previous delivery schedule made by the builder to decide whether to lend to this builder's property.

5. Technical Appraisal- The building must comply with all reasonable technical specifications. Whether it is shafts, elevators, escalators, fire extinguishers, emergency exits, double ladders, etc. The lender’s authorized technical appraisal team will verify every detail. It is not that residential property is not thoroughly verified, but there are more aspects to inspecting commercial properties.

6. Obtaining all statutory approvals- The builder must get all approvals like an approved plan, clearance from various departments like fire, forest etc. There should be no demolition risk on the property due to any pending approvals. Similar is the case with residential property, but as mentioned in the previous point, it is stricter and higher in number for commercial buildings.

7. Loan Tenure- Loan tenure offered in residential property can be up to 30 years, but in commercial purchases, it is mostly limited to 10 years. This means again higher EMI outflow for the borrower.

8. Appraisal- If the purchase cost is increased by the builder/seller to enable the lender to take more money from the lender, it is reduced by an expert appraisal team outsourced by the lender. Almost all of them have several experienced appraisal agents who independently submit reports.

9. Residual Age of Property- Very old properties may not be funded by lenders because of the risk related to the age of the building and also due to lack of proper planning or fire exit or many other things. So, do a quick check-up with your advisor. Even if it is a well-known commercial building in which large corporates reside, it may not be funded by some lenders.

10. Minimum Area- In India, the residential or commercial area is measured in square feet. In retail outlets, there are small spaces called 'vanilla' where usually bank ATMs etc. are made. These can be smaller than 100 square feet. The lender can refuse to fund any space if it is 250 square feet or less. Different lenders will have different policies in this matter, so it is best to double-check with your loan advisor.

Documents required to get a loan on a commercial property

Loan Application: filled out the loan application form with 3 photographs

Proof of Identity (Anyone): PAN/Passport/Driving License/Voter ID Card

Residence / Address Proof (Any): Telephone Bill / Electricity Bill / Water Bill / Piped Gas Bill or Recent Copy of Passport / Driving License / Aadhar Card

  • Property Documents:

    Construction permit (where applicable)

    Registered Agreement / Letter of Allotment / Stamped Agreement for Sale

    Certificate of occupancy (in the case of ready to move property)

    Share Certificate like Maintenance Bill, Electricity Bill, Property Tax Receipt

    Payment receipts or bank account details showing all payments made to builder/seller
     
  • Account Details:

    Last 6 months Bank account details for all bank accounts held by the applicant

    to find if there is any previous loan from other banks/lenders, then the loan account statement for the last 1 year
  • Income Proof for Salaried Applicant/Co-Applicant/Guarantor:

    Salary slips for the last 3 months

    Copy of Form number 16 for the last 2 years also copy of IT Returns for the last 2 financial years, accepted by the IT Department.
  • Income Proof for Non-Salaried Applicant/Co-Applicant/Guarantor:

    Business address proof

    IT returns for the last 3 years

    Balance Sheet of Profit and Loss for the last 3 years

    Business license details (or equivalent)

    TDS certificate (Form 16A, if applicable)

    Qualification certificate (for CA/Doc and other professionals)

Conclusion

Getting a loan on a commercial property proves to be costlier than getting a loan on a residential property, as the tenure is shorter and the rate of interest is higher and more self-contribution is paid. Nevertheless, the 'return' on investment in commercial property has always been high. So, if your property 'qualifies' for funding, why not take some funds on it and achieve more in life and business?

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